By Ann Levine November 6, 2003 – Mail-Well Inc. (NYSE: MWL) announced third quarter net income of $2.2 million or $0.04 per diluted share. Sales in the third quarter were $412.2 million. EBITDA increased 5% to $33.5 million over the same quarter last year. Both sales and EBITDA are up from the second quarter as expected, driven by seasonality of the business. Topics of this summary: - Sector Performance - Business Optimism - Guidance - Q & A Sector Performance Print The Print sector showed a sequential improvement with sales increasing to $195 million up from $191 million or 2% for the same quarter of 2002. For the first nine months in 2003, sales increased 5.2% to $577 million. Additional sales were generated primarily though the Minneapolis fulfillment center. Improvements in the segment reflect the success of cost control programs and significant improvements to operations. Although there have been market share gains and improved EBITDA, Mail-Well does not expect full improvement in this segment until the second half of 2004. Envelopes Soft demand and competitive pricing affected the Envelope sector. Sales were down 5.3% to $168 million. Of the $9 million drop off in sales, 60% was due to volume and 40% due to price. The EBITDA margins were 12.3% in this quarter or $20.6 million. To maintain EBITDA margins, the company will continue to control operating costs and focus on productivity gains. Labor costs have decreased 50 basis points as a percentage of sales. Fourth quarter expectations for the Envelope sector is for performance to be equal or better than last year. Printed Office Products The Printed Office Products sector came in lower than expected. Sales of $49.5 million were 2.4% lower than last year and EBITDA declined to 10.7% from 12%. The sales decline was due primarily to lower sales of multiple sided business forms and price pressure on these products. Volumes on specialty documents and label products are doing well. Business Optimism The company is optimistic on business prospects for a number of reasons stated during the call. Mail-Well is well positioned in attractive markets. The market Mail-Well serves is estimated at $40-$50 billion. As the company positions itself as a high-end supplier, that positioning will allow it to grow the top line. Direct mail was mentioned as a key volume driver as expectations are for the company’s direct mail segment to continue growing as estimates are for direct mail spending to double in size. In an effort to continue to streamline business and increase efficiencies, Mail-Well announced reorganization based on customer needs as opposed to products lines. Instead of aligning along business sectors of Print, Envelope and Printed Office Products, Mail-Well will reorganize into two groups: Commercial Products and Resale Products. The reorganization will help customers buy Mail-Well’s entire product line. Future reporting will be in the two new segments. And finally, industry economic trends are turning around and will boost demand. Mail-Well has seen an increase in recent contract renewals at fixed prices for longer periods of time. The company sees this trend as a leading indicator of an economic turnaround along with recent loosening of capital spending. Guidance Mail-Well forecasts EBITDA for the full year to be $130-135 million. Q & A 1. Mail-well has seen some pick-up in direct mail orders in September and October, however, just six weeks into the quarter makes it difficult to predict trends. The expectation is for significant spending in the first quarter of 2004. Editor's Note: What's surprising is that Mail Well is expecting demand to pick up in the first half of 2004, which is somewhat contrary to what other competitors are saying. At the same time Mail Well does not expect to see improvement in Print earnings until the second half of 2004. 2. The realignment of the sales team will involve surrounding current sales executives with support teams who have expertise in other areas. The plan is to build on current customer relationships. 3. The Federal "Do Not Call" register is expected to prompt more companies to spend marketing dollars in Direct Mail 4. The third quarter was not a great season for auto brochures. This season witnessed greater price competition and Mail-Well chose not to get involved in the fray. There have been no indications that it will not be a good annual report season. Commercial print overall has been showing signs of stabilization in the past six weeks. An example was cited of a contract with a Fortune 50 company to produce its annual report. 5. Capital expenditures for 2004 are expected in the $40 million range. 6. Competitors in the Envelope industry have been under the same pressures as Mail-Well. The company has seen some competitors go out of business on the East Coast and in the Chicago area. Current business is not bad, as the first six weeks of the quarter has shown improvement. Six weeks of improvement, however, does not mean a turn-around. 7. The reorganization will make the business more powerful in the marketplace. Currently there are 17 different channels. Previously, the company has worked within narrow product lines. The reorganization will provide for a broader product line. 8. The company has not felt constrained with the level of capital expenditures. Current actions will not hurt the short or long term prospects for the company. The need for equipment is much less moving forward. 9. Additional changes as a result of the reorganization include the establishment of enterprise groups that have skills that are industry and Mail-Well specific. The company will also surround sales executives with people who have expertise in other areas of the business. On top of these changes, Mail-Well will reorganize segments into Mail-Well Commercial and Mail-Well Resale. The reorganization is happening due to customer needs for buying products from one vender rather than several. 10. Approximately 20% of Mail-Well's revenue is tied to longer-term contracts. 11. Transactional orders for Envelopes grew in the 2% range. Mail-Well continues to see transactional volumes increasing.